Deutsche Telekom AG (DT) Q3 2007 Earnings Call November 8, 0000 2:30 AM ET
This presentation contains forward-looking statements thatreflect the current views of Deutsche Telekom management with respect to futureevents. They include statements as to market potential, the targets 2007statements as well as our dividend outlook.
They are generally identified by the words expect,anticipate, believe, intend, estimate, aim, goal, plan, will, seek, outlook, orsimilar expressions and include, generally, any information that relates toexpectations or targets for revenue, adjusted EBITDA, or other performancemeasures.
Forward-looking statements are based on current plans,estimates and projections. You should consider them with caution. Suchstatements are subject to risks and uncertainties, most of which are difficultto predict and are generally beyond Deutsche Telekom’s control, including thosedescribed in the sections “Forward-Looking Statements” and “Risk Factors” ofthe company’s Annual Report on Form 20-F filed with the U.S. Securities andExchange Commission. Among the relevant factors are the progress of DeutscheTelekom’s workforce reduction initiative and the impact of other significantstrategic or business initiatives, including acquisitions, dispositions andbusiness combinations and cost-saving initiatives.
In addition, regulatory rulings, stronger than expectedcompetition, technological change, litigation and supervisory developments,among other factors, may have a material adverse effect on costs and revenuedevelopment. If these or other risks and uncertainties materialize, or if theassumptions underlying any of these statements prove incorrect, DeutscheTelekom’s actual results may be materially different from those expressed orimplied by such statements. Deutsche Telekom can offer no assurance that itsexpectations or targets will be achieved. Deutsche Telekom does not assume anyobligation to update forward-looking statements to take new information orfuture events into account or otherwise.
Deutsche Telekom does not reconcile its adjusted EBITDAguidance to a GAAP measure because it would require unreasonable effort to doso. As a general matter, Deutsche Telekom does not predict the net effect offuture special factors because of their uncertainty. Special factors andinterest, taxes, depreciation and amortization, including impairment losses canbe significant to the company's results.
In addition to figures prepared in accordance with IFRS,Deutsche Telekom presents non-GAAP financial performance measures, includingEBITDA, EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, adjusted EBIT,adjusted net profit, free cash flow, gross debt and net debt. These non-GAAPmeasures should be considered in addition to, but not as a substitute for, theinformation prepared in accordance with IFRS. Non-GAAP financial performancemeasures are not subject to IFRS or any other generally accepted accountingprinciples. Other companies may define these terms in different ways. Forfurther information relevant to the interpretation of these terms, please referto the chapter “Reconciliation of pro forma figures”, which is posted onDeutsche Telekom’s Investor Relations website at www.deutschetelekom.com.
At our customers' request, this conference will be recorded.Now, please listen to the reports of Rene Obermann and Dr. Karl-Gerhard Eick.Afterwards, you're welcome to ask your questions.
May I now handover to Mr. Stephan Eger.
Good afternoon, ladies and gentlemen. I would like to welcomeyou to our third quarter results conference call with our CEO, Rene Obermann,and our CFO, Dr. Eick.
With that, let me hand over to Rene Obermann to speak aboutthe major developments in the quarter, as well as the progress on our strategy.
Thanks, Stephan. Good afternoon, ladies and gentlemen. Asyou can see from the results for the first nine months that we announced thismorning, we are delivering on our strategy.
Group revenues are up by nearly 3% and internationalrevenues by over 14%. Adjusted EBITDA of EUR14.7 billion means that we are wellon track to achieve our full-year guidance.
Free cash flow in the first nine months of the year was EUR5.8billion. Based on this strong performance, we have raised our full-yearguidance to EUR6.5 billion. Although, adjusted EBITDA for the nine months wasslightly down year-on-year, comparing Q3 2007 to Q3 2006, it has risenyear-on-year for the second quarter in a row.
Net income to date is EUR1.3 billion on a reported basis andEUR2.2 billion, adjusted. The large decrease in net income is largely due tospecial factors and the first-time consolidation of PTC and tele.ring. KarlEick will go into more details on these topics later.
On an adjusted basis, third-quarter net income was actuallyup year-on-year. Operationally, the business is clearly moving in the rightdirection. We have already implemented cost-saving initiatives of EUR1.4billion.
In the fixed-line business, we are delivering on ourbroadband strategy and line losses and quality of service are moving in theright direction. In mobile, our objective of growing internationally is showingreal progress. Note the acquisitions of Orange Netherlandsand SunCom.
Our asset disposal program continues. As you will have seen,we announced, this morning, the sale of Media&Broadcast to TDF for anenterprise value of EUR0.85 billion. Let me go now into the detail of how weare delivering our focused fix and grow strategy.
I start with Germanyand I would like to highlight six areas: broadband, line losses, PSTN linelosses, triple play, quality measures, margins, and mobile customer growth. Wehave had an excellent quarter for DSL retail net adds where, with 480,000 netadds, our market share came in at 48%. So, we're well on course to achieve ourtarget for the year of between 40% and 45%. We're looking here at long-termcustomers, because 80% of the DSL retail base, of our total DSL retail base, isnow locked in through long-term contracts.
In triple play specifically, at the end of September, we hadconnected almost 50,000 customers. We have seen a particularly strong uptakesince the launch of mass marketing of the new Entertain offers at the end ofAugust.
We are also seeing an improvement in the run-rate for linelosses. These are for the first time since Q4 2005 below 500,000, and they arenow at a lower level than at any time in the last four quarters. If we turn nowto our objective of improving service quality, you can see that we have beenmaking very good progress since the strike ended in June.
The percentage of calls that are answered within 20 secondsis now at around 60%, and we're well on course to meet our guidance for theyear-end of over 65%. We have also significantly reduced the order backlog.
Punctuality, however, stands about 70% at the moment. Thatline compliance is still below the target of 80%. In line with our objective ofimproving service levels, we are continuing to expand our own shop anddistribution network. At the end of the third quarter, we had 720 shops, anincrease of 45 shops in the third quarter alone.
Mobile contract net adds have risen sharply in the firstnine months, increasing by almost 40% to nearly 580,000. Max flat customers,that's a flat tariff package, now number more than 800,000 in Germany,and the growth of these packages sold is accelerating with over 270,000 net addsin the third quarter.
Let me stress that, sequentially, we improved the adjustedEBITDA margin at T-Mobile Germany from 36.5% to 37.7%. The improvement incontract minutes of use per customer that we mentioned in Q2 does continue.These increased by 10% in the first nine months.
Finally, let me just remind you that we have the exclusiverights to the revolutionary iPhone in Germany.This goes on the sale starting midnight.Let me move onto the second strategic area, which is: growth internationallywith mobile. We had a very good first nine months.
Revenue growth for the international mobile operations isstrong, up over 14% year-on-year and adjusted EBITDA is even stronger, anincrease of 23% and that's even with the weaker U.S. Dollar.
Growth was supported by the first consolidation of PTC andof tele.ring. Contract net adds have risen by 3.7 million in the first ninemonths and now number more than 57 million of our total mobile customer base,which is approximately 114 million.
There have been two important acquisitions in the pastquarter, Orange in the Netherlandsand SunCom in the United States.Orange Netherlandswe bought for EUR1.3 billion and it will be consolidated as of the beginning ofOctober.
It significantly improves our position in the Netherlands.It means there will be now three, rather than four players in the market, andwe are the number two player now behind the market leader, KPN. We're looking atnet present value synergies here of about EUR1 billion, after restructuringcharges and an annual run-rate of synergies of around EUR160 million. It willbe adjusted EBITDA-accretive as of 2008, free cash flow-accretive in 2009, andEPS-accretive in 2010.
In the U.S.,we announced the proposed acquisition of SunCom. SunCom is a regional GSMcarrier with operations primarily in the Carolinas and Puerto Rico and with more than 1.1 million customers.
This acquisition fits neatly into the current footprint ofT-Mobile USA, increasing its operations to 98 of the top 100 markets, up by 11markets compared to the present footprint. Under the agreement, we will pay$1.6 billion for the outstanding common shares of SunCom.
In addition, we will assume $0.8 billion of net debt for atotal enterprise value of $2.4 billion or EUR1.7 billion at the currentexchange rate. We expect to realize significant synergies with a net presentvalue of approximately $1 billion.
The closing is expected during the first half of 2008 and onOctober 26, we received antitrust clearance. The transaction remains subject toSEC approval, SunCom shareholder approval, and other customary closingconditions.
The U.S.business has had an excellent year-to-date. In dollar terms, service revenueshave improved by over 17% and adjusted EBITDA by over 14%. The adjusted EBITDAmargin improved slightly to 28.3% in the first nine months. In the thirdquarter, the margin amounted to almost 29%, up close to 1 percentage point fromQ3 '06.
We continue to see a strong ARPU development. Blended hasrisen to $51 in the first nine months, and Contract is even up from $56 to $58year-on-year. Over the same period, Contract churn is down and is now below 2%on average in the first nine months. In the third quarter, Contract churn wasseasonally up from the second quarter, but still significantly downyear-on-year from Q3 2006.
Net adds for the years are now at 2.7 million, of which nowalmost three-quarters are Contract. In the third quarter, the prepaid share ofnet adds was up compared to the second quarter due to the popularity of the newFlexPay without Contract offering. However, Contract net adds still amounted to65% of total net adds in the quarter.
MyFace continues to be an important driver of the U.S.business. More about this in a moment, but let me also mention the successfullaunch of the HotSpot@Home offering. Towards the end of September, we launchedthe first PDA with HotSpot@Home service, the BlackBerry Curve with UMAinterface.
The UKbusiness has also had a good first nine months. Service revenues are up bynearly 12% and adjusted EBITDA by over 30%. We've seen strong improvements inmargins, in ARPU and in Contract net adds.
The adjusted EBITDA margin has risen by 4.2 percentage pointsto over 24%, while in the third quarter specifically, it was at over 29%.Blended ARPU in the UKhas risen from EUR28 to EUR31, and Contract ARPU from EUR65 to EUR67. Contractnet adds of 44,000 in Q3 compare with negative Contract net adds of 16,000 inthe same period last year.
One of the drivers of the UKbusiness has been the attractiveness of the Flext tariffs. The number of Flextcustomers, has doubled in the past year and now stands at 2 million.
If we move now to the third element of our strategy, tomobilize the Internet and use Web 2.0 services to increase usage, let me justhighlight, first, the very strong growth in data revenues up by 30% at nearly EUR4billion overall and by over 46% in Euro terms in the U.S.In U.S. specifically; second, non-message data revenue growth, this grew by 42%in the first nine months to EUR1.4 billion; third, UMTS data volumes, whichincreased by 57% between quarter two and quarter three alone; fourth, thestrong growth in web'n'walk and MyFace customers, plus of course the rights tothe iPhone in Germany and the Open Handset Alliance with Google and others inour industry.
As you know, this was announced on Monday with 33 leadingindustry partners. We see this as an exciting opportunity to launch robustwireless Internet and Web 2.0 services for T-Mobile customers in the United States and in Europein 2008. Web'n'walk customers in Europe are now at over 2.8 million, which isan increase of close to 50% over the number at the end of 2006, growthaccelerating quarter-by-quarter in 2007.
In the first nine months, non-voice revenues, excludingmessaging, rose by over 40% to EUR760 million in Europecompared to the same period last year. MyFace in the U.S.has now achieved a total number base -- total customer base of 3.6 billioncustomers. Remember that MyFace was launched at the beginning of the fourthquarter last year, so within the first year in the U.S.,we were able to achieve 3.6 million customers for this innovative service withan identical unique user interface across the entire handset portfolio ofT-Mobile USA.
Non-voice revenues, excluding messaging, in the U.S.have now gone over EUR700 million, an increase of 43% over the comparableperiod last year. We successfully launched MyFace in Germanyand in the UK afew weeks ago. This is a good example of how our European operations benefitfrom our experience in the U.S.
Let me move now to the fourth component of our strategy,which is network-centric ICT services. As you know, network-centric ICTservices are the cornerstones of DT's future corporate customer business andthe successful sale of Media&Broadcast supports this focus further.
We are very pleased that we now have a new CEO in charge ofthat division, Reinhard Clemens, who will be joining us from EDS on December 1.
Recent business highlights include the second largeoutsourcing deal, which we have won in the UK this year with Royal andSunAlliance, and a strong increase in the number of dynamic services projectsin the German mid-sized company market, where we have acquired more than 30 newcustomers in the quarter.
With regards to the system integration activity, it is ourstrong belief that we can only reach real long-term international critical massand competitiveness through pursuing the partnering approach further and withthis in mind, we talk with potential partners and will continue those talksuntil we find a good solution.
Let me conclude with those comments, with some comments onthe outlook. We are now very confident that we will meet our adjusted EBITDAguidance for the year of around EUR19 billion. Free cash flow for the year wenow expect to be significantly higher than our original guidance at around EUR6.5billion. We had previously said around EUR6 billion.
For 2008, we would like to be prudent at this stage becauseof the Dollar developments, the ongoing still-difficult German marketenvironment with heavy competition and regulation, and the need to invest in 3Gin the United Statesand also to invest in VDSL. As a result, we expect adjusted EBITDA and freecash flow in 2008 to be around this year's level. This is after allowing forthe consolidation of Orange Netherlandsand the deconsolidation of Media&Broadcast.
Let me emphasize that, in light of our strong balance sheet,a positive net income and our strong free cash flow generation, DeutscheTelekom remains committed to an attractive dividend policy for ourshareholders.
I will handover to Karl now to go through the financials inmore detail. Thank you.
Thank you, Rene. I will provide you with some more detailson the financial performance of the Group and the divisions. In particular, Iwill spend some time in discussing the various factors impacting net income.
Starting with Group financials, revenues grew by 2.8% to EUR46.7billion in the first nine months of 2007. This, again, is the result of stronggrowth outside Germany,up 14.4% in the first nine months, combined with shrinking domestic revenues,down 6.9%.
Revenue growth was supported by the first-time consolidationof PTC, tele.ring and Gedas and negatively impacted by the deconsolidation of ClubInternet and Ya.com and the U.S. dollar development. At a constant exchangerate, revenues for the first nine months would have been approximately EUR0.8billion higher, which would have led to a total revenue growth of 4.4%. Theshrinking domestic revenues also impacted adjusted EBITDA, which decreased by1.1% to EUR14.7 billion. The third quarter, however, adjusted EBITDA actuallyincreased by 0.6% to more than EUR5.1 billion.
This was the second quarter in a row that adjusted EBITDAhas increased year-on-year. Again, at a constant exchange rate, adjusted EBITDAin the first nine months would have been approximately EUR250 million higher,which would have led us to precisely the same amount as last year. Adjusted netincome decreased by 27.5% to EUR2.2 billion. The effects of purchase priceallocation in connection with the full consolidation of PTC and tele.ringcontributed to this decrease, I will come back to this later.
[Currently], in the third quarter, adjusted net incomeincreased by 6.9% to EUR1.1 billion. Finally, free cash flow, adjusted forCentrica, increased by 52% to EUR5.8 billion. This impressive performance wasdue in part to a reversal in income taxes paid. I will also come back to thislater. Third-quarter free cash flow alone amounted to EUR3.6 billion, more thandouble the equivalent figure in '06. Let me remind you again of the impact ofthe U.S. Dollar on Group revenue and adjusted EBITDA.
Assuming that the U.S. Dollar-Euro exchange rate stays atthe current level of approximately 1.45 in '08, the total impact on Group revenuessince year-end 2006, where the U.S. Dollar was on average at 1.26 until the endof '08, would be approximately EUR2.3 billion, and the impact on adjustedEBITDA would be approximately EUR0.7 billion.
Turning now to the divisions, in broadband fixed network,the revenue and adjusted development was impacted by the deconsolidation ofClub Internet and Ya.com in June and July respectively. During the first halfof '07, these two companies contributed EUR0.2 billion in revenues and minus EUR0.1billion in adjusted EBITDA. Therefore, the deconsolidation had a negativeimpact on revenues, but a positive impact on adjusted EBITDA. This can be seenin the third quarter results. Whereas total revenue has decreased 7% during thefirst nine months, that decreased by 8.8% year-on-year in the third quarter.Adjusted EBITDA declined by 14.9% in the first nine months, but in the thirdquarter, the decrease was only 11.9%.
Overall, domestic revenues decreased by 8% to EUR15.1billion in the first nine months. This was impacted by further line losses,price declines, and the migration from billed minutes to flat rates within thecomplete packages. Domestic adjusted EBITDA decreased by 18.3% to EUR5 billion,this was impacted mainly by the revenue decline and the market invest toincrease the percentage of customers under Contract.
The success of save-for-service cost-cutting program isreflected in the quarterly adjusted EBITDA results. This can be seen mostclearly if you look at the numbers on a like-for-like basis that is excludingClub Internet and Ya.com. In the third quarter, both total and domesticrevenues increased compared to the second quarter. At the adjusted EBITDAlevel, we have seen similar sequential improvements from the second to thethird quarter. Overall, domestic revenues have stabilized at around EUR5billion per quarter this year, while domestic adjusted EBITDA has stabilized,at just under EUR1.7 billion per quarter.
In mobile, we saw a continuation of the positive developmentin the first half of the year. Overall, customers grew organically by almost10% to approximately 114 million with particularly strong growth in the U.S.and Eastern Europe. Revenues also grew by almost 10%.Even so, the contribution of T-Mobile U.S.was held back by the development of the U.S. Dollar exchange rate. Theconsolidation of PTC and tele.ring contributed almost EUR1.6 billion to therevenue increase, but we also saw strong revenue growth, in terms of Euroterms, in the UKand across Eastern Europe.
Adjusted EBITDA grew even more strongly by 12.3% to EUR8.2billion. The consolidation of PTC and tele.ring contributed EUR570 million tothis increase. The UKsaw a particularly remarkable adjusted EBITDA development with an increase ofmore than 30% to EUR0.9 billion in the first nine months. And the Netherlandsand the Eastern Europe operations also saw strongadjusted EBITDA improvements. Business customer trends were essentiallyunchanged with however an improving adjusted EBITDA trend in the third quarter.Overall, revenues decreased by 7% to EUR8.8 billion in the first nine months.This decrease was due in particular to decreasing internal revenues resultingfrom the IT cost cuts imposed.
External revenues decreased to a lesser extent by 3.1% to EUR6.6billion. This decrease in external revenues resulted in particular from lowerrevenues in telecommunications services in the business service area driven bythe decline in legacy services. Adjusted EBITDA decreased by EUR0.2 billion or18.3% to EUR0.8 billion. The absolute decrease was significantly smaller thanthe decrease in total revenues of almost EUR0.7 billion, reflecting theprogress the division has made in improving its cost base.
In the third quarter, adjusted EBITDA decreased by 9.3%. Theadjusted EBITDA margin improved to 10% in the third quarter from 9% in thefirst quarter and 9.5% in the second quarter. After this overview of thefinancial performance of the divisions, let me discuss the headcount reductionsand cost savings in more detail. Our domestic headcount reduction is well ontrack. As of the third quarter, the net domestic headcount reduction amountedto 8,100 employees in '07. In terms of the 32,000 program, we have now reducedthe gross headcount by 23,000 employees, which means that we are more thantwo-thirds along the way. Further reductions are already in the pipeline,approximately 1000 contracts for early and partial retirement and severanceprograms were [assigned] as of the end of September '07.
In October '07, we signed a strategic partnership with NokiaSiemens Networks. As part of this partnership, we expect to transfer ViventoTechnical Services, or VTS, which currently employs approximately 2,000employees, to Nokia Siemens Networks at the turn of the year.
With regards to save-for-service, we are on track to achievethe targeted EUR2 billion gross cost savings in '07. As of the first nine months,we had achieved EUR1.4 billion of actual savings. Furthermore, measures for anannual total of EUR1.8 billion had already been implemented. More than half ofthe actual savings came from BBFN.
Looking at the development of the cost base in the firstmind months, the benefits of the save-for-service program are clear. As aresult of inorganic growth, namely PTC, tele.ring and Gedas, the cost baseincreased by EUR1.2 billion. This was partially offset by foreign exchangeeffects, primarily due to T-Mobile U.S.,amounting to EUR0.5 billion on a net basis.
Higher market spend in the U.S.and Europe increased the cost base by EUR0.9 and EUR1.3billion respectively. These increased costs, however, were significantly offsetby the cost savings from save-for-service of EUR1.4 billion. Overall, the costbase increased by EUR1.5 billion in the first nine months of '07, taken as awhole, the market invest in Europe was more than offset by the save-for-serviceprogram.
Looking more closely at the cost savings of BBFN in Germany,we were able to keep the actual cost base stable in the third quarter comparedto the second quarter, despite continued market invest. This resulted in the netcost savings of EUR0.3 billion. For the full year, we anticipate that we willbe able to achieve the targeted EUR0.9 billion net cost reduction. Rememberthat in the fourth quarter of '06, we had a significant increase in marketinvest in connection with the launch of the new bundled tariffs.
We do not anticipate a similar increase this year. This anddivisional cost savings, namely personnel costs, IT, consulting and other costitems, should result in an essentially stable cost base in the first quarter,implying net cost savings of EUR0.6 billion in the fourth quarter and EUR0.9 billionfor the full year.
Let me make a few remarks on our assets disposal program aswell. We continue to make good progress. In the third quarter, we received thecash for Ya.com of EUR0.3 billion. And this morning, we announced the sale ofMedia&Broadcast to TDF for an enterprise value of EUR0.85 billion. Weexpect to close this sale at the beginning of '08. In total, we have sold to-dateassets with an enterprise value of a EUR2.1 billion. The significant increasein cash flow was due to a number of factors, which more than compensated forthe increase in restructuring payments to EUR1.3 billion in the first ninemonths.
First, we received a net refund in income taxes of EUR0.4billion this year, compared to a net payment of EUR1 billion in the first ninemonths of '06. Second, net interest payments decreased to EUR1.9 billion from EUR2.2billion in the first nine months of '06. Third, cash CapEx decreased by EUR0.6billion to EUR5.3 billion. Two-thirds of this decrease in cash CapEx came frombroadband fixed network, due to lower VDSL CapEx in particular, with theremainder coming essentially from the mobile division. Including the proceedsfrom the disposal of assets and adjusted for Centrica, free cash flow beforedividends increased by more than EUR2 billion or 52% to EUR5.8 billion.
Let me emphasize, in this context, that our new '07 guidanceof EUR6.5 billion is equivalent to a free operational cash flow of EUR8billion, as the EUR6.5 billion is after projected full-year restructuringpayments of EUR1.5 billion.
Coming to reported net income, here we saw a decrease of EUR1.3billion in the first nine months of '07, compared to EUR4.1 billion in thefirst nine months of '06. This significant decrease was caused by a number ofordinary and special effects. First, depreciation and amortization increased byEUR0.5 billion due to the consolidation of PTC and tele.ring. Of this about, EUR0.4billion was due to purchase price allocation, namely the write-down of brandnames in customer bases. Second, net financial expense in '06 has benefitedfrom a gain from a sale of Circom in Malaysia.Third, income taxes in '07 were impacted by a non-cash write-down of deferredtax assets of EUR0.7 billion in connection with the '08 corporate tax reform.
We had flagged this, which is non-cash, at the time of thehalf-year results. Due to the reduction in corporate tax rates, the net presentvalue for future savings from tax loss carry forwards, among others, has beenreduced. We took this charge in the third quarter. In contrast, '06 incometaxes had benefited from a tax gain in connection with the net operating lossesin the U.S. of EUR1.3 billion. Since the vast majority of the decline inreported net income was due to special factors, net income adjusted for specialfactors decreased to a more, smaller degree. It amounted to EUR2.2 billion inthe first nine months of '07, compared to EUR3 billion in the first nine monthsof '06. About EUR0.4 billion of this decline was due to the effect of PTA inconnection with a consolidation of PTC and tele.ring, as I mentioned already.Looking at the third quarter of '07 alone, adjusted net income actuallyincreased by 6.9% to EUR1.1 billion.
Turning to the next slide, you can see the differencesbetween adjusted and reported net income explicitly. Just to mention the mainspecial factors, reported EBITDA includes EUR0.4 billion of restructuringcharges. Reported depreciation and amortization includes a goodwill reductionat T-Mobile Netherlands of EUR0.2 billion, which was offset by an equivalenttax gain. Let me be clear that this goodwill reduction is not the result of animpairment test but is due to the [acceleration] of deferred tax assets on taxloss carry forwards, which we acquired in connection with the purchase of (inaudible)in the Netherlands and which we are regarded as not likely to be realized atthe time of that acquisition.
Reported income taxes includes the EUR0.7 billion write-downon deferred tax assets in connection with the '08 corporate tax reform, whichwas partially compensated by exceptional tax gains amounting to EUR0.5 billionprimarily at T-Mobile, Germany. In this context, let me mention that DeutscheTelekom performed its annual, goodwill impairment tests at September 30. Thesetests did not result in any impairment of goodwill for any of the Group assets.
Finally, our balance sheet continues to remain in excellentshape. Compared to the end of June, net debt decreased by almost EUR4 billionas a result of the strong free cash flow and an EUR0.4 billion foreign exchangegain. Dealing improved to 0.8 times from 0.9, and the exit ratio to 38.2% from37.9%. Please note that, at the beginning of the fourth quarter, we paid EUR1.3billion for the acquisition of Orange Netherlands.Therefore, based on our new free cash flow guidance, net debt should increaseslightly in the fourth quarter.
With this, Rene and I are now ready for your questions.
Thank you, Dr. Eick. I think we should start right away withthe Q&A session. The operator will start with some initial remarks on howto handle the session.
Thank you very much, Mr. Eger. The question-and-answersession will be started now (Operator Instructions). Mathieu Robilliard from ExaneBNP Paribas.
Mathieu Robilliard - Exane BNP Paribas
Yes. Good afternoon. I had two questions, please. First, interms of the mobile revenue line in Germany,there was some deterioration in the service revenue growth, which was minus 5versus minus 3 in the previous quarters. Could you give us a bit of color as towhat is behind that deterioration? Is it pricing trends? Is it a lesser growthof usage? And what should we expect for the fourth quarter of this year interms of general trends?
The second question has to do with M&A. There has beenrecurring press comments about potential interest of Deutsche Telekom in assetsthroughout Europe. I mean, I don't know, at this stagehow precise you want to be. But maybe you could give us a little bit more colorin terms of what kind of assets you would be looking at in general in mobile Europeand what kind of assets you certainly wouldn't be interested in? Thank you.
Yes, let me answer that quickly. Mobile revs have beenaffected in this quarter for the first time with the roaming price decreases,which were imposed on the industry and that hit the market and it hit us, it'sa double-digit impact.
And also, pricing overall in German mobile minutes came downfurther quite aggressively. Minutes of use were up, actually, 10% year-on-year,so we do see both. We see fast price decreases. It's sort of expected, isn'tit? And we also see minutes of use uptake.
So, still the outlook is, at some stage, I guess elasticitywill reach the inflection point, but as we talked about a few months ago, thatmay still be a little bit of time ahead, but I'm overall still optimistic thatthere is more minutes to come in Germany.
M&A? Look, I can repeat what I've always said, will becontinued discipline in execution and we will always apply strict financialdiscipline. And the first thing is intra-market consolidation. As you've seen,we've executed, within very few months, two examples of that strategy.
And then, of course, we would not rule out any adjacentmarkets or any other markets at this point in time. Just please bear in mind,we are financially disciplined and we will continue to keep strict financialdiscipline. We’re not making any stupid moves here.
Ric Prentiss from Raymond James, may we have your questionplease?
Ric Prentiss -Raymond James
Yes, good afternoon. A couple of questions for you on the U.S.wireless business, if I may? First, the economy here in the U.S.has been a little rough lately. Just wonder if you're noticing anything ineither your third quarter net adds, which looks pretty good, but as you lookinto fourth quarter, as far as concerns on the economy or subprime issues herein the United States.
Then a second question: as you look to clear the spectrumfrom Auction 66, how much CapEx should we be looking at next year to startrolling out that service? Is there some kind of CapEx per population number weshould be thinking about? Thank you.
We've seen continued strong growth in Q3, even comparison tolast year. The business growth, the customer growth was stable, although notstable, even a little better than last year.
I think, growth since last year was slightly beyond 800,000;this year in Q3 it was 857,000. Contract ratios were still strong, so we don'tsee a big impact on our business from the sub-prime consumer maybe a slowdownhere, but maybe it's a little early to tell. But I would not be in a positionto say we are very concerned about this at this point in time.
Business is still going on strongly and of course, we willdo our best to keep that up. When it comes to CapEx overall, you've heard usforecasting, from a Group level for next year, very strong cash flow on ahigher level than expected for this year.
We'll continue this level into '08, even though we do investa little more next year, particularly in 3G in the U.S.,as well as in VDSL and in broadband overall, and in new service platforms. So,therefore, expect our cash flow to be on a strong level, around the level ofthis year at least.
Mr. Nick Delfas from Morgan Stanley, may we have yourquestion please.
Nick Delfas - MorganStanley
Thanks very much. I've got several questions. First off allon taxes, could you just let us know what you think your effective tax rate asa Group should be in the future, assuming full payment of taxes, excluding thetax credits you have?
So just to try and understand, whether we should be reducingyour tax rate to 30% or somewhere between 39% and 30%. Secondly, what are yourexpectations for the timing and quantum of the mobile termination rate cuts for2008 in Germany?
And lastly, on Slide 24, you talked about net OpEx savingsand the target of EUR0.9 billion and that you've achieved EUR0.3 billion in thefirst nine months. I don't quite understand how you get that figure, could youjust talk about how you calculate the EUR300 million? Because if I look at thedifference between revenues and the difference between EBITDA in the nine monthfinally; you get about less than EUR200 million reduction. And then that will helpus understand what you're planning for Q4. Thanks very much.
Well, perhaps I’ll start with your first question, Nick,which was about taxes and the question about the effective tax rate. On alonger-term and a longer perspective, a normalized effective tax rate on theGroup level should be somewhere, let's say, between 35% and 37%, not to be seennext year. And I think one always has to keep in mind that our cash taxes paidare for a very long time going to be strongly below that number.
OpEx numbers, well, I tried to explain, in my presentation,that the OpEx savings on a net basis at BBFN totaled EUR0.3 billion. I alsotried to make it clear that this reduction, in comparison to the last quarterof the last year is going to strongly increase. The reduction to the lastquarter of last year is going to strongly increase, due to the fact that OpExstrongly increased in the fourth quarter and in the last year, due to theincrease or due to the new introduction of our new bundled tariffs.
We have seen a strong OpEx increase in the fourth quarter oflast year, which we're not going to see in the fourth quarter of this year. TheOpEx space in BBFN is going to be more or less stable with a consequence thatwe're very confident that our net OpEx reduction in BBFN will totally amount toEUR0.9 billion.
Now, there is clearly good explanations from our costdefinitions for that. First and foremost, we now see the positive impact whenit comes to OpEx development out of the new agreements with unions due to thein-sourcing and due to the salary reduction.
We also see the positive effects of the lengthening of theweekly working hours. We see nice reduction in marketing expenses by say,EUR0.3 billion. All that together, I think, finally will lead to this net OpExreduction of EUR0.9 for full year.
On the MT fee cuts, the last year's cuts were in thevicinity of 10% or 11% even. When it comes to '08, there is no final regulatorydecision yet. We have what we believe provisioned reasonably high in ourforecast for next year, in our budget for next year, so I do not think we willbe surprised or caught by surprise with higher than expected termination ratecuts.
May I ask you please to restrict to one question only, aswe've got a lot of questions in the pipeline, please? Thank you.
Mr. Simon Weeden from Goldman Sachs, may we have yourquestion please.
Simon Weeden -Goldman Sachs
Yes, you may. I'm just trying to select my chosen question.I'm going to ask on the dividends, if you don't mind, whether you wouldconsider that your form of words on the dividend would incorporate a flatdividend year-over-year, or perhaps we could be expecting to announce thisyear, an increase? Thanks.
Obviously, at this point in time, we can't make anycommittal statements here on dividends, because that is subject to the[GREMIA], but I think we've been loud and clear in saying, the management teamis very committed to a good dividend policy for our shareholders.
We understand the importance of the dividends. Obviously, webelieve we've increased our substance in the business by providing better thanexpected cash flow, by also showing a good trend on the operational side.
So, all I can say is, we remain committed to a veryattractive dividend policy and everything else will follow as soon as we cansay something more specific.
Mr. Graeme Pearson from Lehman Brothers, may we have yourquestion please.
Graeme Pearson -Lehman Brothers
Yes. Thanks, good afternoon. I just wanted to return to theCapEx question that was asked earlier. It looks like you spent less than 5%CapEx to revenues in German mobile in the first nine months of the year andthat's despite completing the first phase of the upgrade of the GSM network.
So, the question is what do you think is a sustainable levelof CapEx going forward in mobile these days? And also, can you comment on howmuch spare capacity you have on the network in Germanyregarding traditional voice, but also given the significant ramp in data whichis starting to come through? Thank you.
Look, on the CapEx level for mobile Germany,we've been achieving so much more in terms of building new sites, replacing oldstuff equipments i.e. with the latest moves we made on enhancing it by EDGE andso forth. We've done so many things and we have the leading network in Germany,and our CapEx level has been always at a very good ratio.
And, we think, we're going to be, more or less, in the sameballpark in the future, and yet we will upgrade our network further and willbuild further HSDPA capabilities and so forth. So, we feel quite good about it,not so much because of the absolute numbers, but because of increased CapExefficiency. We get so much more for the dollar than we used to get a few yearsago.
This goes along with a good feeling about our network herein Germany. Ithink we have still enough capacity for the time being to handle the traffic. Ithink, on average, the used capacity in our network is somewhere between 50%and 60%. That's on average.
You always have your peaks, but that's nothing where wewould say we expect a significant increase of our CapEx spending to increasethe capacity of our German network.
Mr. Randall Pollock from Vanguard, may we have your questionplease.
Randall Pollock -Vanguard
Thank you. Would you be willing to let your bond ratingsdecline in order to make a significant acquisition?
Well, bond ratings: that's always an issue. We have alwaysmade it clear that we don't want to be, we do always want to have undisputedaccess to the capital markets. Unrestricted access to capital markets meansstrong ratings.
Strong rating also was A, BBB minus. This was always ourguidance. Again, the reason behind is unrestricted access to the capitalmarkets. We see some pressure from the rating agencies already because some ofthe rating agencies are looking at us with a negative outlook.
I think we are very confident to stabilize our today'srating on the basis of our free cash flow in a third quarter. But again, we dowant to be strong when it comes to our rating, which means A minus or BBB plus.
Mr. Peter Nielsen from Cheuvreux, your question, please.
Peter Nielsen -Cheuvreux
Thank you, Peter Kurt Nielsen from Cheuvreux. Questionrelated to the domestic BBFN business, please. I appreciate you do not givedivisional guidance, but clearly in your outlook for 2008, the domestic BBFNbusiness is a crucial part.
Could you potentially sort of share bit of your thoughts onhow you see this business developing in 2008? Also, included today's commentson the current stabilization of revenues and EBITDA in that business? Thank youvery much.
I will answer your question in a more strategic way becausewe are still not intending to give divisional outlooks. But look, we've beenyear-on-year, we've become so much stronger in our competitiveness because, bymaking more customer-oriented offers, packages, bundles, double-play, we've increasedthe number of customers on DSL who can not churn, because we've prolonged theircontracts.
Now, 80% are in longer-term contracts. We've increased ourdistribution capacities and our access to the market. We work on our costpositions. Now, clearly, the PSTN line losses, to some extent, will continue. Idon't expect them to go down significantly, to be honest to you, but we willtry and step-by-step compensate at least to a good extent by increasing our DSLnumbers and keeping a high share in DSL, and by additional services.
So, overall, I don't want to be overly enthusiastic here; Ithink that would be unreasonable. But I see there's a good trend, particularlywhen it comes to broadband, and we will continue that trend.
Mr. Jacques de Greling from Natexis, may we have yourquestion please.
Jacques de Greling -Natexis
Thank you. I just would like to have a specific figure,either in percentage or in amount, of the EBITDA in terms of EBITDA impact forthe roaming regulation for the European mobile assets for 2008. Thank you.
It's a double-digit number; that's as specific as I want tobe on the topic. It's a double-digit number. It has an impact on the bottomline this year, and it will have also an impact on the bottom line. Next year,it's well within our guidance, though. It's one of the factors, which we needto factor in for next year.
Again, when it comes to '08, we just want to be prudent atthis point in time. We know we have a couple of factors to deal with next yearand the last thing we wanted to disappoint you guys. So, we will be prudent. Wehave everything factored in we believe we can factor in and let's see how itgoes.
Mr. James Ratzer from New Street Capital and your questionplease.
James Ratzer - NewStreet Capital
Yes, thank you. I had a question just regarding the costbase within BBFN. You've given guidance for this; you have EUR900 millionreduction. I was wondering: if you could help us in terms of what we should bethinking for next year? I mean: do you think you can do another EUR900 millionreduction in the business?
And if I could just have a very quick second question: couldyou tell us what the EBITDA is at the Media&Broadcast business that you'vesold is? Thank you.
Well, let me start with the EBITDA in Media&Broadcast.EBITDA in Media&Broadcast is slightly below 100. That's why we think it wasa good price and a good consideration we have achieved.
Now, when it comes to your first question with costreduction, OpEx reduction out of sales for service, altogether for next year,we have foreseen EUR0.8 billion cost reductions, which bring the program upfrom EUR2.0 billion we have seen in this year to EUR2.8 billion.
Clearly, a significant impact or the significant part ofthis additional OpEx savings of EUR0.8 million will come out of BBFN, and Iwould say perhaps 50% or so will be contributed out of BBFN.
Mr. Lrich Rathe from Dresdner Kleinwort, may we have yourquestion please.
Lrich Rathe -Dresdner Kleinwort
Good afternoon. I have a question regarding your verysuccessful share of the broadband net adds. Do you feel there's sort of an endat some point? I know your guidance for 2007 is only 40% to 50% of the marketthere.
But: do you sort of foresee an end to that? Do you foresee atime at which point you might turn a more friendly face towards the broadbandresellers and to leave them a bit more in the market for regulatory or otherreasons? Thank you.
There is a very simple answer to your question. No, we willcontinue to work hard on our market share in retail. Frankly, resellers arewelcome to partner with us, but we will not give up our competitive position.
This would be strategically wrong and long-term financiallyalso wrong because, when the market grows, you don't want dozens of competitorsto develop strength. In fact, we want to develop our own strength and our ownmarket position, and that will help us financially long-term. So we will keeptrack.
However, there are competitive responses and there arealways slight ups and down with share, so you shouldn't expect all the time up50% or so, but our strategic target is between 40% and 45% for this year. Maybewe can do a little better even next year; we will see.
Mr. David Strauch from Oddo, may we have your questionplease.
David Strauch - Oddo
Hello. Concerning your guidance of about EUR19 billion for2007, it means that the EBITDA should be around EUR4.3 billion in Q4. Thatwould mean something EUR250 million below Q4 '06. If I look at Q3 '07 it wasstable compared to Q3 '06, is there any reason to expect a year-on-yeardecrease in Q4, or is it just that you are cautious?
Well, as Rene Obermann has already mentioned, we do want tobe prudent. Guidance in terms of EBITDA is approximately 19. We are veryconfident that we're going to make it. That's why I think the calculation youhave made is clearly supporting it, which was also the reason that we have seena very strong free cash flow and that's also the reason why we've increased ourfree cash flow guidance.
Mr. Frank Rothauge from Sal Oppenheim, may we have yourquestion please.
Frank Rothauge - SalOppenheim
Hi, my question is related to T-Systems. Now, as you have anew Chief Executive for T-Systems onboard, when are you able to share with us aclear strategy for T-Systems going forward after partnering strategy which youannounced previously you have not been able to realize that? Thank you.
Yeah, Mr. Rothauge. Let me take that question. I think thestrategy has been announced very clearly. It has two aspects. Number one aspectis, we position T-Systems as the leading player in the European market when itcomes to ICT services, which are services that are more network-centric, andvalue-added services on top of the pure connectivity, i.e. hosting, security,call center solutions, et cetera, et cetera.
We are not going to be on our own, in the future,sufficiently successful in software development for a whole range ofapplications, which are outside of our core business and therefore, we'retrying to find a partner for that space. As you have noted and rightly pointedout, partnering for the division is not trivial, because the division is verylarge and therefore it takes time.
We obviously have to take a number of interests here intoaccount. We can't do a quick and dirty solution; we don't want to. Andtherefore, we try and find a long-term, sustainable solution. Reinhard Clemensnow, our new CEO for that division being on Board.
He will continue to sort of sharpen our position vis-à-visthe system integration business, and he will update you in due course. But Iwould actually push back a little bit on the fact that we haven't positionedthe company. In fact, we are winning deals again. We've been successfulrecently in hosting deals and in outsourcing. So I think the company is gettingpositioned, it takes a little time. It's a big elephant. As you know, we had noleadership for quite a while on that division from the industry. And therefore,give us a little bit of time. We will do our job.
Mr. Francois Arth from Societe Generale, may we have yourquestion please.
Francois Arth -Societe Generale
Yes, good afternoon. I just have one question on the UK.Basically, you showed a very strong recovering margin. The question is: is thatsustainable in Q4 and even in 2008? Or: do you expect Q4 to be tough, as itprobably will be? But 2008, 29% seems to be very high. Basically: how do youexplain it? And: what do you expect for the future?
No doubt the UKmarket is competitive, but as you see, we've increased customers and improvedmargins, and improved ARPU and so forth. So, we just, I think worked for quitesome time on the attractiveness of our offerings.
And so we expect Q4 always to be a little dominated byChristmas, seasonal impacts. But overall, I can't and I would not predict anymajor deterioration on the UKat this point in time, but we also don't guide on a specific country-by-countrylevel per division here. Thank you.
Mr. Hannes Wittig from JP Morgan, may we have your questionplease.
Hannes Wittig - JPMorgan
Yes. Good afternoon. Thank you. I have a question regardingyour cash flow guidance for next year. In particular, I would like to know:what you have provisioned for any potential expenditure on spectrum, be it in Germany,the U.S. or inthe UK? At thesame time may I ask for: a little bit of an update on your thinking regardingthe U.S. 750 mega hertz auction that is coming up in January?
Hannes, I'm sorry. We can't give any information on thistopic, even if we'd loved to, but we can't. Sorry for that.
Mr. Mike Williams from Citi, may we have your questionplease.
Mike Williams - Citi
Yeah. Good afternoon. Most of my questions have been asked,but perhaps a question on the outlook for domestic mobile. E-Plus has indicatedit wants to double its revenue share to Germanytargeting 25% share overtime, and talking about a pretty aggressivepre-Christmas campaign.
I wonder how you think about: the competitive dynamics ofthe domestic mobile market over the next 12 months, from a strategicperspective in terms of issues: such as pricing trends, SAC and those sorts ofissues? Thanks very much.
I think the German trend has been already triggered towardsdrastic price decreases. Two years ago, or two and half or maybe not muchalmost three years ago, but increase in the last 12, 18 months through theintroduction of all these second brands and retail brands such as [RD] andalike.
So I do not expect any major change to the trend in Germany,because average minute prices are still, in comparison to other markets, on afairly high level. But as we've discussed I think several times now, theaverage minute price decline will, at some stage, lead to more uptake on theminutes.
Yes, minutes use is only 10% up, but I think we will comecloser to another 50 points no overtime. So, I don't expect any major change tothe German competitive dynamic. I also expect us to maintain our position.We've been strengthening our position on, for instance, by selling more maxpackages, big bundles, very successfully.
So that's where the focus is. And then Congstar again,entering the prepay field, fishing in the pond of low frills or no-frills [FIN]customers. So, for us: no major change. We will continue to defend our positionand work on our margins. As you see, our margins have gone up slightly.
Mr. Andrew Beale from Arete Research, may we have yourquestion please.
Andrew Beale - AreteResearch
Hi, I've got a question on '08 guidance and EBITDA. I justwanted to check: whether you're roughly flat? I mean: my understanding of thedefinition is that it excludes the EUR100 million from Media&Broadcast yousold, it includes Orange Netherlandsand uses, I think, the first: the average of the exchange rates in the firstthree quarters of about 1.37.
But doesn't include any contribution you might get fromSunCom. I'm just wondering: whether you think your roughly flat allows for thecurrent spot rates, 1.46, 1.47? And, also, if you could tell me: what the CapExand revenue from Media&Broadcast were? Thank you.
Well, your view of the content of our guidance is correct.SunCom is not included due to the fact that we do not know when we getregulatory approval. It's clear we do not know when we're going to see a firstconsolidation here. Yes, we have taken the average Euro U.S. dollar exchangerate as the basis for our planning, which also means that we will see and willhave to see how the average Forex is going to develop.
And clearly, it has an impact. That's why we have said we'regoing to be in the same magnitude with our EBITDA guidance for next year. Whenwe come back to Media&Broadcast, as I have already mentioned, the EBITDAcontribution of Media&Broadcast was slightly below 100 and the same is truefor the CapEx spending.
Mr. Guy Peddy from Blue Oak, may we have your questionplease.
Guy Peddy - Blue Oak
Yes, good afternoon. Just almost following on from Andrew'squestion, your CapEx is down about 10%, 11% this year. Can we assume that thatsort of follows through for the rest of the year? And, also, next year: I thinkyou suggested that CapEx would be up a little bit, but given the OBIDA you'reexpecting to be flat. And this year you've had a very substantial tax credit.
I'm just trying to work out: how you'll get to flat freecash flow next year, unless you're assuming also another great big tax credit?Could you just talk us through some of the underlying assumptions for workingcapital on tax and things like that? Thank you.
Excellent question, Guy! Yes, you are right. We will, firstand foremost, see, as always in the last quarter, a stronger CapEx coming in,which means that our CapEx will be somewhere, say between approximately 7.5,perhaps a little bit higher. That's what we would expect in terms of CapEx forthis year. And yes, we are going to see a smaller CapEx increase.
And yes, we are not planning a cash tax refund for next yearas well, which really opens the question: how to stabilize our free cash flow?There is two good reasons, first and foremost, EUR1.3 billion of severancepayments we will see for full year this year are going to be nicely lower. Andon the other side, we will continue our work on with our working capitalmanagement. Then last but not least, we're going to see what we have to pay interms of cash taxes.
Clearly, we're not planning for a cash tax refund again, butit's always difficult to anticipate where cash taxes are going to be.Altogether, we are very confident that we can meet the same free cash flownumber next year as we have seen this year.
[Mrs. Laura Gentlums] from UBS. May we have your questionplease?
Laura Gentlums - UBS
Thanks very much. Good afternoon. I had a quick question onBBFN, please. It looks like, on the calling revenues [it's very] high margin ofcourse, the major drag has been price declines for just over the last year,which has been running at a rate of more than 20%. Do you think these pricedeclines are going to slow any time soon, particularly given that a lot of yourpeers across Europe seem to be taking advantage of priceincreases in the (inaudible)? Thanks very much.
Yes, I don't think we can assume major declines in the shortterm. The move here is going towards packages, so in the past, it was morevariable costs which were charged. Now customers are more and more accepting oradopting tariff packages, bigger bundles.
That's also our strategic goal it’s really to sell bundleshere in fixed-line as well as mobiles. So, overall prices per unit may decrease,but we will work against that by selling bigger and bigger bundles for DSL andvoice and various services.
Mr. Jonathan Dann, from Bear Stearns, may we have yourquestion please?
Jonathan Dann - BearStearns
I mean, it's a very straightforward one. T-Mobile Germany itlooks like you've had relatively limited data per user graph where as in allthe other countries, data per user or data per SIM card has gone up a lot. Canyou talk us through what's happening?
I think the prime reason for that is the high number ofmachine-to-machine SIMs prepay and the fact that prepay as such has, ingeneral, in the industry, a fairly high inactivity rate, particularly inGermany. That's due to the legal requirements and the ability to deactivatepassive SIMs. So I think that's a little the picture gets a little distorted becauseof that effect.
Mr. John Karidis from MS Global, may we have your questionplease?
John Karidis - MSGlobal
Hello there, thanks very much. I just really wanted tocomplete the picture of the exceptional impacts on the guidance for 2008 at theEBITDA level. So, you talked about the EBITDA contribution forMedia&Broadcast being slightly less than EUR100 million.
What would be the contribution from OrangeNetherlands?Simply to get an impression of what the underlying guidance is? Please.
John, the positive contribution from OrangeNetherlands ismore or less the same amount to what I've described in Media&Broadcast. So,it's also a little bit below 100, which means that Media&Broadcast and OrangeNetherlands arecontemplating each other.
Again, in our guidance, we have for good reasons, notincluded any effect out of the first consolidation of SunCom.
Mr. Andrew Hogley from Execution, may we have your questionplease?
Andrew Hogley -Execution
Hi, Good afternoon, gentlemen. If we can go back to BBFN theimprovement in line loss and other things is encouraging. I was wondering thathas been an [limit there on naked] DSL with respect of issues next year thishas been any indications on pricing yet for that product.
Andrew, could you repeat your question? It's very hard tounderstand you.
Andrew Hogley -Execution
The question was about: naked DSL. Is there any indicationon pricing for that product in Germanynext year?
No, we don't have any indications that it has, but in ourplan for next year, I think we've been prudent in forecasting all of theseeffects. Also, by the way, we'll also provide products based on naked DSLourselves, I guess, in the timeframe of CeBIT, so we will respond tocompetitive moves there, and it's factored in.
Ladies and gentlemen, the conference is about to end. Shouldyou still have several questions, we kindly ask you to contact me or ourInvestor Relations department.
[Mr. Stefan Fretter], may we have your last question,please?
Yes, good afternoon. Last question, on ratings again you'vealready outlined that you intend to keep a very strong rating in the A minus,BBB plus rate range. But on an annual basis, your leverage is well below yourtarget range of two to three times net debt to EBITDA.
Can we expect, going forward, maybe a deliberate move intothat range? And: would that possibly be the to the extent that you do somethingwhich pleases the shareholders? Thank you.
Nice try to asking about the share buyback. Well, first andforemost, I think the point already I've made and the ranges now we have given,are unchanged for a very long time.
Yes, we always have considered: how to make use of the financialflexibility we are having in the best interest of all of our shareholders? ButI think everybody knows, out of all the conversations we have now and we hadnow for a very long time, that we are as forced as management Board of thiscompany, not too much in favor of share buybacks if this is not supportingother interests of Group development.
So, thanks a lot for participating in the conference call.We very much hope to hear each other again on the fourth-quarter results.Good-bye.
We would like to thank you for participating at thisconference. A recording of this conference will be available for the next sevendays by dialing Germany496992053333. I repeat Germany496992053333. We are looking forward to hear from you again. Thank you and goodbye.
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